The Professional Advisory February/2010

The

43 Professional

Advisory For Dental Professionals

IN THIS ISSUE A GOOD PROBLEM WITH YOUR DENTISTRY PROFESSIONAL CORPORATION

THE REFERRAL: AN OFTEN OVERLOOKED OPPORTUNITY Dr. Ron Weintraub

David E. Rosenthal BA., LL.B.

SPLIT = TAX SAVINGS REVISIT RISK - NOW!

David Chong Yen CFP, CA

Mark McNulty BA, CFP, CIM

CAN YOUR PRACTICE SURVIVE? Dr. Ian Wexler

PLANTING THE SEEDS FOR SUCCESS Ian Toms B.Sc. (Hons)

TO OWN OR NOT TO OWN PRACTICE REAL ESTATE? THAT IS THE QUESTION David Lind

plus NO WORRIES! NOTES FROM THE EDITOR

VOL. 43 : FEBRUARY, 2010

The Professional Advisory

VO L. 43 : FEBRUA RY 2010

The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different eld. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.

No Worries!

RALPH CRAWFORD BA., DMD While browsing through a recent edition of the Optimist - a local Delta B.C. community newspaper - I came across an article where the author was concerned about what she considered the inappropriate, and increasing, use of the term “No Worries”. As an example she used asking a waitress, “May I have more coffee?” and receiving a reply, “No worries!” And again in a ladies shop she mentioned to the clerk, “I believe this sweater is marked down,” and getting the reply, “Oh, no worries.” The point the author seemed to be making was that she herself wasn’t particularly worried about anything beyond HINI and the spiralling federal deficit and the appropriate answers should have been, “Certainly, I’ll get you more coffee”, and “Yes, the sweater is marked 50 per cent off.”

Interestingly, the article initiated a follow-up letter to the editor outlining that the author should really have “no worries” as the phrase has Australian origins meaning you have no worries. Upon checking Wikepedia, the Internet encyclopaedia, I found, No Worries is indeed an Australian English expression, meaning “do not worry about that”, “that’s alright”, or “sure thing”. My mind then cast back to the mid 1950s and early 1960s Mad Magazine’s gap-toothed Alfred E. Neuman and his signature phrase, “What, me worry”. With all this “playing around” on one simple word I couldn’t help myself from checking my trusted Webster dictionary which told me that worry is “to feel distressed in the mind; to be anxious, troubled or uneasy”.

I then found a reference attributed to Dr. Edward Hallowell, noted Harvard psychiatrist and author of Worry, who argues that while “Worry serves a productive function”, “anticipatory and dangerous” worrying - which he calls “toxic worry” - can be harmful

for your mental and physical health.

And I suppose the next step was rather natural. Do dentists worry? Should they worry? What are they doing about it? The Professional Advisory in its own inimitable way deals with the very issue. Worried about taking a market risk? Mark McNulty in Revisit Risk - Now! deals with a risk profiler application that can evaluate your risk tolerance. And if you’re anxious about attracting new patients Ron Weintraub can put your mind at ease as he outlines how The Referral is An Often Overlooked Opportunity. Troubled about whether To Own or Not to Own Practice Real Estate?

David Lind makes it clear - the decision should be based on sound financial reasoning, not emotion. And do you ever wonder how to pay the bills if your had a disability and couldn’t practice. Ian Wexler answers the question Can Your Practice Survive? by outlining the importance of Business Overhead Expense insurance. Ian Toms reminds every tenant that many decisions need to be made concerning their leases but by retaining a qualified professional to administer the lease affairs they are Planting the Seeds for Success.

Show us a dentist - or any Canadian citizen - who isn’t concerned about paying taxes. Both David Chong Yen in Split = Tax Savings and David Rosenthal with A Good Problem With Your Dentistry Professional Corporation take the worry out of sending too much money to the Canada Revenue Agency by involving family members in reducing overall tax bills.

No Worries! I doubt if there are very many Alfred E. Neumans around with the “What, Me Worry” philosophy. On the other hand I’m sure we can all agree with Dr. Edward Hallowell that worry can serve a productive function. And as so often indicated and suggested within the pages of the Professional Advisory, the best way to turn a worry into a productive function is to seek the advice and expertise of specialists in their field. PA

crawford@dccnet.com

The Professional Advisory

VO L. 43 : FEBRUARY 2010

A Good Problem With Your Dentistry Professional Corporation DAVID ROSENTHAL BA., LL.B. Since 2002 dentists in Ontario have been permitted to incorporate dentistry professional corporations (PC) and carry on their dental practice through a PC. As I and my colleague, Barry Spiegel, Q.C. (now retired from the practice of law), discussed in previous articles of The Professional Advisory, the laws were changed in 2006 to permit family members of a dentist to be non-voting shareholders of the dentist’s PC. A “family member” is defined as a dentist’s spouse, child or parent. A “spouse” is defined as someone to whom the dentist is married or with whom the dentist is living in a conjugal relationship outside marriage. “Child” is not defined but is generally taken to mean the dentist’s natural born children and those the dentist legally adopts. However, it is important to note that only the dentist’s parents but not in-laws or grandchildren qualify as family members.

Using a PC has many benefits, primarily tax driven.

Benefits include the low corporate income tax rate, ability to sprinkle dividends among family members and the capital gains exemption on the sale of PC shares. And with the dentist having his/her family members as non-voting shareholders there are additional tax planning opportunities for dentists and family members to defer and save taxes. I am not a tax lawyer so I urge you to contact an accountant or other tax advisor who specializes in advising dentists.

Such advisor can provide you with proper tax advice and planning.

‘Planning’ is the key word. You need a proper action plan and you should implement that plan years in advance of a sale or other triggering event. This may sound extreme but it is not. In the past year a number

of dentists and their advisors have contacted me regarding a problem with their PC, namely that the PC has been accumulating surplus funds. This is a good problem to have, especially in this current economic environment. But it is a problem.

Keep in mind that a PC’s business is restricted to the practice of dentistry and activities related to or ancillary to the practice of dentistry. Surplus funds are either withdrawn from the PC or remain in the PC and invested by the PC. Over the past six years quite a number of dentists have accumulated such large amounts of surplus funds in their PC that it has created a potential tax problem upon a sale of the PC shares. To qualify for the capital gains exemption, there are numerous legal tax rules and requirements including the ‘50 per cent rule’. That rule requires the PC have less than 50 per cent of its assets in passive (non-dental) assets for the whole two year period prior to the sale of shares.

In some cases, the PC has accumulated so much surplus funds that the PC does not meet the 50 per cent rule. Therefore, to qualify for capital gains exemption on a sale of the PC shares, the PC in those cases must divest itself of those surplus funds more than two years before a sale. To do so requires careful legal and tax planning.

The Certificate of Authorization is issued to the PC by the Royal College of Dental Surgeons of Ontario (RCDSO) and is required before and during all times a PC carries on the practice of dentistry. The RCDSO does not revoke or issue a Certificate of Authorization on a certain time or day. And as noted above, only a dentist or family members can own shares of a PC. That means a ‘typical’ tax plan may not work for a PC as those plans may result in the PC not being in compliance with the legislative requirements for maintaining the required Certificate of Authorization.

There is no perfect solution to this ‘good’ problem of your PC having to deal with its accumulated

The Professional Advisory

VO L. 43 : FEBRUA RY 2 010

funds. But the best advice is clear. You must implement with experts in their field, they will serve you well. PA a proper legal and tax plan years in advance. And to do Rosenthal is a senior lawyer with Spiegel Rosenthal Professional that you should retain professional advisors, especially David Corporation whose practice is devoted to corporate, commercial and tax advisors/accountants, who specialize in advising business law, with special emphasis on advising and consulting for the dentists. As my former colleague, Barry Spiegel, Q.C. dental profession. He can be reached at (416) 865-0736; or fax to used to recommend and I still do: Surround yourself (416) 203-8592; or e-mail to david@drlaw.ca.

Revisit Risk - Now! MARK McNULTY BA, CFP, CIM www. mcnultycentre.com

Hopefully by now you have gained back the losses you experienced in the stock market in 2008. It would make sense at this time for you and your spouse to ask yourself, “Can we stomach that roller coaster again”?

Now is a great time to revisit your tolerance for risk.

I don’t mean risk in general terms, but rather as it relates to your family and your money. Your risk tolerance is your ability to handle declines in the value of your portfolio.

One determinant of risk tolerance is your retirement plan. As a dentist, you do not belong to an institutionally managed pension fund. However, your portfolio has the same objective as a pension fund – to meet a series of payments for the rest of your life. But like pension funds, when it comes to managing your retirement holdings you cannot simply buy a bond and expect to meet your retirement income needs.

Interest rates are now simply too low. You require some exposure to the stock market.

While we cannot control the ups and downs of global stock markets, we can control how much money we have exposed to the stock market. By determining what (reasonable) rate of return we require to meet your needs, we can then figure out how much money we must invest in the stock market. This provides a calculated recommendation for your risk tolerance which is one half of the equation on how much risk you should take on.

The other half of the equation in determining your

risk tolerance is psychological. It is an opportune time to revisit how you are feeling. Why is it such a good time? The problem with discussions on how risk averse we are is that our feelings are largely dependent on how the portfolio is doing. In other words, when people win, they like risk. When they lose, they hate it.

In the past two years, we have both won and lost. That is why it is such a good time for this risk tolerance analysis. We are better educated about the ups and downs that can occur because we have just experienced them.

To facilitate this discussion with our clients, we have hired an Australian firm called FinaMetrica. Their risk profiler application was developed and tested with the assistance of the University of New South Wales’ Applied Psychology Unit. The FinaMetrica system has gained international recognition as the world’s best risk tolerant measurement since its launch in 1998. There are 25 plain English questions and there are no right or wrong answers.

However, you do not need to be one of our clients to use FinaMetrica. Simply visit their site www.finametrica.com. By the way, we have no financial ties with the company and are in no way endorsing them as a way to assist in your financial decision making. It’s just that for our clients it is a good way of encouraging deeper thought and discussions about risk.

The Professional Advisory

There are many different ways to evaluate your risk tolerance. And I don’t think you should listen or adhere to any one site or system. This is an individual decision and what works for one person might not work for another.

Why is it so important to be revisiting risk now? You should make sure that if and when the next downturn occurs, you will be well prepared and have done your research. There is sure to be another correction.

Whether it occurs in two months or three years, a correction of the stock market will occur again.

This discussion is intended to help you determine

VO L. 43 : FEBRUARY 2010

how you would act in such a downturn, prior to it happening. If you cannot stomach another drop like you saw in 2008, I encourage you to make a change before it happens again. PA

Mr. Mark McNulty BA, CFP, CIM, is a Financial Advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. He may be contacted at 905-470-6222ext 209 or mark.mcnulty@raymondjames. ca. The views of the author do not necessarily reect those of Raymond James. This article is for information only. Securities are offered through Raymond James Ltd., member CIPF. Financial planning and insurance are offered through Raymond James Financial Planning Ltd., which is not a member CIPF.

Can Your Practice Survive?

DR. IAN WEXLER www.protect-ins.com

Your practice, after you, is your most valuable asset.

Nothing else comes close.

Imagine for a moment, that this morning you slipped on an ice patch outside of your home and fractured your femur. After surgery, you are going to be out of the office for five months. How will your practice survive in your absence? Who will run and maintain it? How will overhead expenses be paid until you return? That is what Business Overhead Expense (BOE) insurance is for!

How important is BOE coverage?

Having handled dozens of claims, it is certain that for many dentists BOE insurance is the most important insurance they have; in the short term it is even more important than Long Term Disability insurance.

Having been in over a thousand practices, it is no secret that practice overhead expenses are high.

For the average general practitioner fixed overhead expenses encompass around 75 per cent of all overhead expenses. This includes rent, salaries, loan principal (not all plans) and interest, as well as others.

The average ‘monthly’ fixed overhead for a practice is

in excess of $25,000. Not having the proper funds to pay these expenses if you are sick or injured could cripple your financial state and practice beyond repair.

How does BOE insurance work?

BOE is a disability or living benefits plan that reimburses the dentist or one of his/her corporate entities (e.g., their Professional Corporation) during a qualifying partial or total disability. Typically plans are structured with short waiting or elimination periods, e.g., 30 days, and have shorter benefit periods than long term disability, e.g., one year.

How difficult is a BOE claim?

Successful management of a BOE claim is very difficult. After assessing contract wording and qualification, the claimant must: 1. Properly fill out all claim forms; which include indication of total or partial disability, your specific limitation(s) in the practice and whole range of very tricky and detailed questions; 2. Gather proper financial documentation to support the claim, and; 3. Submit the claim in an organized and timely fashion.

It is my opinion that handling a BOE claim on your own without professional assistance by someone who is well-versed in BOE claims is a recipe for disaster.

False expectations Many dentists believe that BOE coverage is

The Professional Advisory

VO L. 43 : FEBRUA RY 2010

unnecessary for the following reasons: • How BOE benefits are calculated and paid, for 1. Hygiene services and revenue will continue both partial and total disability. Some, for example, reimburse loan principal, while others do not; uninterrupted; • Riders offered; 2. Associates and/or partners will fill in; • Premium.

3. Other dentists or specialists from a study club or A few final thoughts other group will fill in; 4. They can cut back on staff and office hours during 1. Every practice is different with regards to the amount and structure of BOE coverage. a claim; 2. General practices require a different BOE struc5. The bank, landlord, etc., will “cut them some ture than specialty practices. slack”.

3. Ensure your advisor is familiar will all BOE plans, how they work, and is well-versed in successfully All of these are, in realistic terms, false expectations handling BOE claims. that in most claim circumstances will not support the practice.

• Many patients do not wish to be scheduled for separate recall exams from their routine hygiene visit. A number of patients will simply choose to wait for your return.

• Most patients want you to perform their dentistry, not someone else.

• Although others may fill in for you in the short term (weeks or a few months), you must consider what will happen if the claim proceeds longer than anticipated.

• Staff and patients will not respond positively to cutbacks in any fashion. Imagine the impact on your practice’s value if the disability were career ending.

• Do not expect your bankers and landlord to be overly sympathetic and supportive.

New Practices Many dentists who open or purchase a practice fail to understand the true financial impact of a short or long term disability claim on their new practice. For many dentists in this situation, BOE coverage represents an unwanted additional business expense. If you fall into this category, just ask yourself, what will happen to your practice and your bank loan with little to no practice revenue? The reality is that you can’t afford to not have this coverage!

How plans differ Dentists should be aware that plans vary significantly in terms of: • Guaranteed contracts and premiums; • Structure of plans, e.g., elimination and benefit periods; • Wording and definitions of disability;

Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, annuities, and other insurance products and services to professionals, executives, and business owners across Ontario. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@ protect-ins.com

The Professional Advisory

VO L. 43 : FEBRUARY 2010

Planting The Seeds For Success IAN D. TOMS B.Sc. (Hons) www. iantoms.com

Every tenant needs to make many decisions concerning their lease. Deciding who will complete any negotiation is a primary decision.

Tenants often consider completing the negotiation themselves. Occasionally they retain someone who completes a few lease negotiations each year as an ancillary portion of their main focus. The third alternative is to retain a professional who specializes in lease negotiation.

Tenants choose their representative based on a perception of value: 1. Is the effort required and fees charged by an advisor greater than rental savings? I don’t want to waste money by retaining a professional.

2. I don’t want to spend the time and money on a professional because there’s probably not anything in my lease that isn’t “normal”. If something does come up I’ll deal with it then.

Ignorance is bliss. Choosing inappropriate representation can result in very expensive lease problems that may not surface for many years - when it’s too late to do anything about them. Properly done, a professionally negotiated lease will save the tenant initial rent payments, but equally or more important, the negotiation will plant many seeds for very significant savings years after the initial negotiation.

I have included two examples to illustrate my point.

Renewal Most (not all) leases include renewal options of some form or another which must be properly written and administered to protect lease terms and conditions, since these lease terms and conditions in large part determine the value of the practice and eventually, the

operators retirement fund. In short, flawed or missing renewal options can eliminate your retirement fund.

Recently I completed a term renewal negotiation. The lease was well written and negotiated several years ago. The practice had flourished and the dentist was looking forward to selling his practice - in fact he had an interested party working as an associate. The lease term had to be extended on the same terms and conditions as the current term in order for the operator to sell his practice and retire. I became involved when tenant, who was administering lease issues himself, became frustrated by landlords slow response. It became immediately apparent that landlord was intentionally delaying the renewal negotiation process hoping that tenant would allow the renewal option to expire because landlord was intent on introducing an early termination provision to the lease.

Properly done, a professionally negotiated lease will save the tenant initial rent payments, but equally or more important, the negotiation will plant many seeds for very significant savings years after the initial negotiation.

I administered the renewal option and forced the landlord to extend the lease term without adding the option to terminate the lease, which enabled the sale, and therefore retirement, to proceed. A few months later the client contacted me to confirm that in fact the buyer had purchased his practice. The net effect is that by investing in professional representation, both during the initial lease negotiation and during the term renewal negotiation, this tenant saved net of fees, approximately $300,000 in leasehold improvement costs associated with a forced relocation, and was able to retire!

The Professional Advisory

Relocation Some leases contain a provision which enables landlord on short notice to force tenant to move to alternate premises, often with landlord only paying for a portion of the expense. If triggered, the result is that the clinic will be closed during the move, and tenant has to pay part or all of the cost of overhead, equipment, fixtures and leasehold improvements, and move to less attractive or productive premises.

I negotiated a lease for a relatively large practice which was relocating a number of years ago. In addition to negotiating a “good deal”, many terms and conditions, including the relocation provision, were adjusted in tenants favour.

Recently, tenant was advised that landlord required the tenant to relocate to alternate premises within the plaza. The space was inferior in many respects, and landlord’s initial position was that tenant would need to pay for a significant portion of the cost of the

VO L. 43 : FEBRUA RY 2 010

relocation. The exact mechanism to create and manage tenants leverage position was negotiated into the lease during the initial lease negotiation, and again, by retaining an experienced professional, instead of losing many thousands of dollars, tenant actually made money on the relocation! The net effect is that by investing in professional representation both during the initial lease negotiation, and during the relocation negotiation, this tenant saved, net of fees, approximately $375,000.00!

Invest in your future. Plant the seeds for success by retaining a qualified professional to administer your lease affairs. PA

Mr. Toms has been creating and preserving realty leasehold value for tenants and landlords since 1986 and can be reached at (705) 7431220, by e-mail at iantoms@pipcom.com, or through his web site at: www.iantoms.com

The Referral: An Often Overlooked Opportunity generated referrals as the lifeblood of most specialists’ practices.

DR. RON WEINTRAUB www.innovativepracticesolutions.ca

Dentists frequently consider ways to attract new patients. Despite efforts to brainstorm for ideas, The Referral is an often-overlooked opportunity to increase our roster.

Why Do We Need The Referral?

From specialists’ perspective, the referral base is a crucial part of the lifeblood of the practice. It is essential because endodontists, oral and maxillofacial surgeons, prosthodontists, periodontists, and orthodontists have a finite relationship to their patient base; therefore, the patient complement requires replenishing on an ongoing basis. This leaves confrere-

How Do Specialists Attract And Maintain Referral Sources?

Most influential in generating continued activity from referring offices is patients’ reports of positive experiences. To elicit such a response, following the cardinal principles of customer service is helpful. First, specialists need to become familiar with new patients’ profile prior to their initial visit to understand them and their reason for presentation. The team should welcome new patients warmly to put patients at ease.

After the visit, doctor-to-doctor communication or, if impractical, administration-to-administration is effective. Most important, however, is for the specialist to make a follow up care call to patients as well as to the referring doctor. Patients view this personal call significant, and it contributes to their perception of a caring practitioner. Referred specialists want to leave

The Professional Advisory

the impression that their office is an extension of the general practitioners’ office and has the same interest in patients’ welfare.

How Do Newly Certified Specialists Attract New Referrals?

Newly certified specialists often find breaking into an established referral pattern a daunting task. The keys to gaining practitioners’ confidence are by building rapport, sharing information, and showing respect for their existing affiliations thus allowing the specialist a foothold into their referring pattern. Conversations should reflect specialists’ willingness to fill the gap for emergency cases until an appreciation of their ability to help the office’s patients is developed.

How Do Established Practices Generate Referrals?

Often established practices have two distinct bases for generating referrals. The newest members of our patient family have the most potential to be our offices’ ambassadors; therefore, they are the most productive referral sources. They have recently passed through the new patient intake process where everyone endeavors to impress them. Staff generally exposes new patients to a “Wow” experience. Receptionist, treatment coordinator, clinical assistants, hygienists, and dentist focus on new patients’ needs and strive to develop a friendly relationship within the clinical environment. After careful new patient intake, comprehensive complete oral exam, and successfully delivered treatment, the patient may comment that he/she has never had such thorough care. That is the quintessential moment to ask for a referral.

Existing patients have already formed a positive opinion of our office because we have met their expectations. Asking them for referrals after a successful visit is also valuable. The team can ask for The Referral in the presence of a positive outcome.

They can also respond to patients’ compliments saying that Dr. X enjoys these types of procedures, but successful outcomes depend on their cooperation.

By adding a personal note telling patients we would also enjoy treating their family and friends gives the unspoken message that those they refer would be equally cooperative.

How Do We Create Other Opportunities To Generate Patient Referrals?

Another way to generate patient referrals is to place a sign saying we welcome new patients referred by our existing patients. We might also tell our patients that we will expand our working hours to include

VO L. 43 : FEBRUARY 2010

Saturdays and evenings to accommodate new patients.

What Is The Right Timing For Internal Marketing?

Asking for The Referral from new or existing patients needs effective timing. Most often, patients express satisfaction with their experience immediately following the appointment. Sometimes, opportunities to ask for The Referral exist at the completion of a lengthy procedure when patients move from active treatment to recare mode or when a patient mentions dental challenges of a family member.

To emphasize the importance of patients’ referrals, handing them an office brochure including a new patient referral card is appropriate. In addition to requesting pertinent information on the card, it also indicates that in their honour, we will donate to their favourite charity in appreciation of their confidence in our office.

In order to add to our patient load we need to let other professionals know of our areas of service and gain their confidence. Moreover, we need to tap the resources of our own patient base by giving them the opportunity to talk to others about our services.

Positive experiences give them a platform to make it easy to tell others about us. We borrow the marketing strategy word-of-mouth marketing to get referrals from other professionals and our existing patients. Getting The Referral is crucial in maintaining our patient base. PA Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-ve years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have beneted from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.

The Professional Advisory

VO L. 43 : FEBRUA RY 2010

Split = Tax Savings DAVID CHONG YEN CFP, CA www. dcy.ca

By splitting income legitimately among family members, you are able to reduce your family’s overall tax bill. Here are a few ways to do it: Low interest loan The 2010 first quarter prescribed interest rate is to remain at one per cent. If you lend money to your spouse or children or a family trust (for benefit of spouse/minor children) at one per cent interest, you may be able to reduce your family’s overall tax bill.

Here is how it works: 1. If you lend say $80,000 to your low income spouse/minor children/a family trust at one per cent, they could invest the $80,000 in some investments which hopefully earns more than one per cent income. All the income earned will be taxed in these low income earners’ hands and all you have to report is the one per cent interest income, i.e., $800.

2. Write a cheque from your own personal bank account and same can be deposited in a bank account of the low income spouse/minor children/a family trust. Note the bank account must not be a joint account with you.

3. It is advisable to document the loan by way of a promissory note which clearly states the amount loaned, the date of the loan, the interest rate charged and the annual interest will be paid within 30 days after the end of the calendar year.

4. The investment must be registered in the loan recipient’s name only, not a joint investment account.

5. Actual annual interest of $800 must be paid on or before 30 days after the end of the calendar year.

Failure to make the interest payment in any one year will taint this maneuver - you must report all the investment income (except capital gains for minor children).

6. You report the $800 while the loan recipient reports the investment income earned on the

$80,000 - but they can also claim a deduction for the $800 paid to you.

Please note that if you lend money to children 18 or older, you do NOT have to charge any interest, in which case the entire income on the funds lent to the adult children can be taxed in their own hands.

Reasonable salary When your family members work/provide services (including child care) to you/your business, you can pay them reasonable salaries. Proper documentation is important and this includes a job description, payment via cheques and in the same frequency as your other employees (if applicable). You may be able to avoid paying Employment Insurance (EI) which will save you more than $2,000 a year. The employment income will also create RRSP room for the individual. An individual could earn about $10,400 in 2010 and pays virtually no tax, provided one has no other income.

If you pay an unreasonable salary to a family member, the tax department can challenge your deduction without adjusting the amount taxed in your family member’s hands. Here is how it works: if you pay a salary of $100,000 but the tax department believes that $40,000 is more reasonable, you will only be allowed to deduct $40,000 as an expense while the individual continues to pay personal tax on $100,000.

The $60,000 will be taxed twice - once in your hands and again in the hands of the family member.

Shareholders (Owners of Your Corporation) If you have incorporated or are th inking of

The Professional Advisory

incorporating your practice, you should consider including certain family members in your corporate structure. There is no limit as to who can be shareholders of a holding corporation which owns your dental building or other investments or a technical or hygiene corporation. However, there are limitations for a professional corporation (PC). Only parents, spouse and children of the dentist are allowed to be shareholders of a PC in Ontario. Careful planning is necessary so that you have full flexibility in determining the dividends to be paid to each family member.

If your parents each make say $12,000 a year and they are shareholders of your professional corporation, each will pay $2,400 on $30,000 cash dividend (eight per cent tax). If the dividend was paid to you, you

VO L. 43 : FEBRUARY 2010

would have paid $19,200 on the $60,000. This maneuver should result in $14,400 of tax savings.

Extra care must be taken if your parents qualify for Old Age Security, Guaranteed Income Supplement or any other government assistance.

The above tax savings strategies have one common goal: deflect income away from the richer individual into the poorer person’s hands. PA David Chong Yen, CFP, CA, of DCY Professional Corporation Chartered Accountants, has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.

To Own Or Not To Own Practice Real Estate? That Is The Question DAVID LIND www. ppsales.com

Real Estate for many people is intoxicating. In this article we will look at what drives people to own real estate for their practice, how to analyze the factors that contribute to making the decision to own, and finally, the impact that decision will have on the sale of the practice.

Here are a few reasons why people like real estate; • Long term capital appreciation.

• The pride of ownership.

• You can build from scratch or renovate and get exactly what you want.

• You never have to worry about what the landlord might do at the end of the lease.

• By using leverage, you can acquire valuable property with relatively little capital.

The decision to own real estate should be based on sound financial reasoning, not emotion.

It is perfectly acceptable to buy a house to live in based on emotion, but not a place to conduct business.

For these and several other reasons many dentists choose to own their own premises. But is it really financially viable? Further, how does someone contemplating buying a practice that includes real estate analyze the benefits of owning versus renting? Lastly, how does someone who is facing the decision of renewing a lease or buying or building their own premises make the decision?

The decision to own real estate should be based on sound financial reasoning, not emotion. It is perfectly acceptable to buy a house to live in based on emotion,

The Professional Advisory

but not a place to conduct business. The business will be paying for the real estate and the “occupancy cost” entry on your financial statement is indifferent as to whether the money goes to a landlord or a bank. What is important is how much it costs and can the practice afford it. You should try and keep the occupancy cost to 6.5 per cent of your gross billings or below.

Let’s look at a couple of examples where we have worked with dentists who own their real estate.

Dentist 1 Dentist 2 Gross Billings $1,434,000 $257,000 Occupancy costs $18,000 $47,000 Occupancy costs % 1.8% 18.2% Practice Value $1,600,000 $203,000 Real Estate Value $135,000 $340,000 Location Small Town GTA In the first instance it is really obvious that owning the real estate makes perfect financial sense. We were able to sell the practice very quickly and the purchaser paid a premium over the appraised value for the real estate since the value and occupancy costs were so low relative to the practice value.

For Dentist 2, the occupancy cost is far too high relative to the practice billings, and the value of the real estate exceeds the value of the practice. In this case the dentist would have been better off not owning the premises since the real estate has put his practice out of balance financially. Obviously I have chosen extreme examples to illustrate the range that we see. Most cases fall somewhere in the middle of these extremes.

If you are looking at real estate for your practice it is probably easiest to “back” into the decision. By that I mean determine how much you can afford for occupancy and then determine if that will allow you to own. For instance, if your gross billings are $1,000,000, your

VO L. 43 : FEBRUA RY 20 10

occupancy costs at 6.5 per cent would be $65,000 annually. Taxes, maintenance and insurance will take up roughly $21,000; utilities and maintenance reserve another $15,000 leaving approximately $29,000 to cover interest on the debt. This will cover the interest on a mortgage of approximately $525,000 at 5.5 per cent. Please note I have calculated this based on covering the interest portion of the payments, and not included the principal portion of the payment because the principal portion is essentially building up future equity. The principal portion will have a modest impact on current cash flow. In the scenario above you could purchase real estate worth $700,000 with a 25 per cent down payment.

While purchasing real estate for your practice will make sense for some people, it is certainly not for everyone. In general, you don’t see large corporations owning their own real estate. This is primarily due to the return on capital that they need to achieve in their business. For most corporations a better return can be achieved by deploying their capital in their core business then in real estate.

There are many other factors to consider when making the decision to own or rent. Your accountant, banker and financial advisor can all help you make an intelligent decision. Just remember to keep the practice in balance so the real estate makes it easier not harder for you to sell your practice. PA

David Lind is a Partner in Professional Practice Sales (Ontario) Ltd. (www. ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com

The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your “professional advisors”.